The private sector is full of businesses that just can't get loans at workable terms. The big reason for that is that all the money that used to go to the private sector is now being lent to the government as seen in this Fed data.
Well, what would the curve look like if banks were issuing actual loans instead of just taking their money and buying treasuries. i.e. Banks now are lending to the government where in the past they would lend to the private sector.
It would be an interesting exercise to impute the price of treasuries if you took out all the capital going to the government and put it into the private sector instead.
1) Government borrowing rates would be higher
2) Spreads would be more narrow
3) The yield curve would not be as steep.
Given the government is borrowing quite a bit now, isn't it somewhat fortuitous that banks are not lending elsewhere? What happens if banks actually start to lend to businesses? What should the Treasury be doing right now to position itself for a lot of long term borrowing?
If the government shifted duration to longer term securities in an aggressive way would that by itself spur lending to small businesses by banks since a lot of their treasury purchases are very short term? Or would that simply instill some sense of panic and push short term interest rates down further, making the curve even steeper?
A delicate issue of timing the duration of Treasury auctions needs to go way up, and issuance (deficits) need to come down. The Fed has a very accomodative monetary policy, let some of that do the heavy lifting. That will ameliorate some inflation concerns. If this government spending was useful like getting us onto natural gas
and off foreign oil, I'd be all for the government spending. Instead it's going to programs that only encourage artificially high consumption and encourage long term deficits.
Corporations are willing to invest but can't because the government is sucking up the capital with useless wastes of money that we'll be paying off for 30 years. Business has been crowded out. Time to put some emergency spending cuts in and let the Fed's easy money do the work without inflationary deficits.